Small Business Tax Planning Tips

The One Big Beautiful Bill Act (OBBBA), which became law on July 4, 2025, includes many favorable changes that will help small businesses and their owners. But it's not all good news on the business tax front. Here are some tax planning ideas to consider before year end to optimize your tax outcome.

Timing Strategies for Owners of Pass-Through Business Entities

Tax tip. Some small business owners may be able to adjust the timing of income and expenses to optimize their tax results.

The details. The federal income tax rates for individuals may be relevant if you operate your business as a sole proprietorship or one of the following types of pass-through entities:

• A single-member limited liability company (LLC) treated as a sole proprietorship for tax purposes,
• A partnership,
• An LLC treated as a partnership for tax purposes, or
• An S corporation.

Taxable income generated by these entities passes through to the owners and is taxed on their personal returns. The OBBBA makes the individual income tax rates established by the 2017 Tax Cuts and Jobs Act (TCJA) permanent. Specifically, the OBBBA makes permanent the 10%, 12%, 22%, 24%, 32%, 35%, and 37% rates with annual inflation adjustments to the rate bracket thresholds. (See "2025 Individual Federal Income Tax Rates" below.) For 2026, the inflation adjustments likely will be modest.

Now that there's more certainty about federal income tax rates for the next few years, owners of pass-through entities can consider timing strategies. If you expect to be in the same or lower income tax bracket for 2026 than you are for 2025, follow the traditional strategy of:

• Deferring taxable income into 2026, and
• Accelerating deductible expenditures into 2025.

At a minimum, this strategy will postpone part of your tax bill from this year to next year by reducing the income that passes through to your personal return for 2025. Contact your tax pro for specific ways to defer passed-through income.

Conversely, if you expect to be in a higher tax bracket for 2026 than you are for 2025, take the opposite approach:

• Accelerate income into 2025, and
• Postpone deductible expenditures until 2026.

That way, more passed-through business income will be taxed at this year's lower rate instead of at next year's higher rate. And postponed deductions will save more tax next year when you're subject to a higher rate.

Strategies to Optimize the QBI Deduction

Tax tip. Owners of sole proprietorships and pass-through entities may be eligible for a special tax break based on qualified business income (QBI). However, several rules and restrictions apply. In addition, other tax planning decisions can affect this deduction, so it's important to work with your tax professional to develop a comprehensive tax planning strategy.

The details. The TCJA introduced a personal deduction for up to 20% of a pass-through entity owner's QBI. You can also claim the QBI deduction for up to 20% of qualified REIT dividends and up to 20% of qualified income from publicly traded partnerships.

The new law makes the QBI deduction permanent. However, it remains subject to the following restrictions that can apply at higher income levels:

General reduction. Above certain taxable income levels, the QBI deduction can't exceed the greater of the owner's share of:

• 50% of W-2 wages paid by the business, or
• The sum of 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified depreciable property used in the business.

For 2025, these limitations begin to apply when taxable income (calculated before any QBI deduction) exceeds $197,300 ($394,400 for married couples filing jointly). These limitations are phased in over a taxable income range of $50,000 ($100,000 for joint filers). So, they're fully phased in when taxable income exceeds $247,300 ($494,400 for joint filers).

Starting in 2026, the OBBBA increases the taxable income phase-in ranges for these limitations to $75,000 ($150,000 for joint filers). This change will increase QBI deductions for many small business owners.

Special phaseout rule for SSTBs. The QBI deduction for specified service trades and businesses (SSTBs) is reduced over the same income ranges as for the general reduction and then completely disallowed above the top of the applicable range. The expansion of the ranges beginning in 2026 will increase QBI deductions for many SSTB owners.

Taxable income limitation. An individual's allowable QBI deduction can't exceed 20% of his or her taxable income (calculated before any QBI deduction and before any net capital gains and qualified dividends).  

Because of these income-based limitations on the QBI deduction, tax planning decisions can affect your allowable QBI deduction. For example, you might inadvertently reduce your allowable QBI deduction if you claim significant first-year depreciation deductions or make sizable deductible retirement plan contributions. Work with your advisor to optimize your overall tax results.

Important: The OBBBA also establishes an inflation-adjusted minimum QBI deduction of $400 for taxpayers with at least $1,000 of QBI from one or more active businesses in which they materially participate. "Material participation" generally requires regular, continuous and substantial involvement by the taxpayer in business operations. The minimum deduction will become available beginning in 2026. Both the deduction amount and the QBI threshold will be adjusted annually for inflation going forward.        

First-Year Bonus Depreciation Deductions

Tax tip. The new law provides generous first-year bonus depreciation write-offs for eligible business assets that are placed in service during the current tax year. To take advantage of these breaks, consider making eligible asset acquisitions — and placing those assets in service —before year end.

The details. The OBBBA permanently restores 100% first-year depreciation for eligible assets acquired and placed in service after January 19, 2025. Before the OBBBA, the first-year bonus depreciation rate for all of 2025 was scheduled to be only 40%.

Assets eligible for first-year bonus depreciation include most new and used depreciable personal property. Examples are:

• Equipment,
• Computer hardware and peripherals,
• Commercially available software,
• Certain vehicles, and
• Real estate qualified improvement property (QIP).

QIP is defined as an improvement to an interior portion of a nonresidential building placed in service after the date the building was placed in service. However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don't count as QIP and usually must be depreciated over 39 years.

Heavy SUVs, pickups and vans used more than 50% for business are eligible for 100% first-year bonus depreciation because they're treated as transportation equipment for federal income tax purposes. Heavy means a vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds.

The OBBBA provides another favorable improvement on the depreciation front: It allows 100% first-year depreciation for qualified production property (QPP) in the year it's placed in service. This additional break is available for qualified property with construction periods beginning between January 19, 2025, and December 31, 2028. The property must be placed in service in the United States or a U.S. possession before 2031.

QPP means nonresidential real estate, such as a building, that's used as an integral part of a qualified production activity, such as the manufacturing, production or refining of tangible personal property. Before the OBBBA, nonresidential buildings generally had to be depreciated over 39 years. Contact your tax advisor for full details on the new 100% first-year depreciation rule for QPP.

Sec. 179 Expensing Election

Tax tip. The OBBBA liberalized the rules for first-year Section 179 depreciation deductions. The changes provide further incentives for small business owners to make eligible asset acquisitions before year end.

The details. For eligible assets placed in service in taxable years beginning in 2025, the maximum amount that can be immediately written off in the first year under Sec. 179 is $2.5 million (up from $1.25 million for 2025 before the new law). However, a phaseout reduces the maximum annual Sec. 179 deduction if the taxpayer places more than $4 million of eligible assets in service during the year (up from $3.13 million for 2025 before the new law). The increased Sec. 179 figures will be adjusted annually for inflation for taxable years beginning in 2026 and beyond.

Most assets that are eligible for bonus depreciation are also eligible assets for purposes of the Sec. 179 deduction. In addition, Sec. 179 deductions are also allowed for:

• Roofs,
• HVAC equipment,
• Fire protection and alarm systems,
• Security systems for nonresidential real property, and
• Depreciable personal property used predominantly in connection with furnishing lodging.

There's a special limitation on Sec. 179 deductions for heavy SUVs used over 50% for business, meaning those with GVWR between 6,001 and 14,000 pounds. For tax years beginning in 2025, the maximum Sec. 179 deduction for a heavy SUV is $31,300.

Important: It's generally advisable to claim 100% first-year bonus depreciation to the extent allowed, rather than claiming Sec. 179 deductions for the same assets. Sec. 179 deductions are subject to several limitations that don't apply to first-year bonus depreciation. In particular, Sec. 179 deduction limitations apply at both the entity level and your personal level if you're claiming a deduction from an interest in a partnership, an LLC that's treated as a partnership for tax purposes or an S corporation. Contact your tax advisor for more information.

But keep in mind that assets acquired January 1, 2025, through January 19, 2025, and placed in service any time in 2025 will be eligible only for 40% bonus depreciation, not 100%. So those assets may be good candidates for Sec. 179 expensing if eligible.

Favorable New Rules for R&E Expenditures

Tax tip. Businesses are no longer required to capitalize certain domestic research and experimental (R&E) expenditures. If your business invests in these activities, you may be eligible for an immediate write-off for the full amount of current year expenditures — and possibly qualify for additional write-offs for capitalized domestic R&E activities from previous tax years.  

The details. For taxable years beginning in 2025 and beyond, the OBBBA allows businesses to immediately deduct eligible domestic R&E expenditures. The deduction must be reduced by any tax credit for increasing research activities claimed for those expenditures. Before the OBBBA, domestic R&E expenditures generally had to be capitalized and amortized over five years.

Most small business taxpayers can file amended returns to apply the new immediate deduction rule retroactively to taxable years beginning after 2021. Consult your tax advisor for the details. Additionally, all taxpayers that made R&E expenditures in taxable years from 2022 to 2024 can elect to write off the remaining unamortized amount of those expenditures over a one-year or two-year period. This option starts with the first taxable year beginning in 2025.

QSB Stock Strategies for Start-Ups

Tax tip. If you're considering establishing a new business, consider funding it and getting qualified small business (QSB) stock in return.

The details. Gains from selling QSB stock are potentially eligible for a gain exclusion break, exempting all or part of the otherwise-taxable gain from federal capital gains tax. Not all small business stock qualifies. Before the new law, if you owned QSB stock for at least five years, you could generally qualify to exclude 100% of your gain.

The OBBBA liberalizes the eligibility requirements by increasing the asset ceiling for QSBs to $75 million (adjusted for inflation after 2026). Previously, the asset ceiling was $50 million.

It also allows:

• A 50% gain exclusion for QSB stock held for at least three years,
• A 75% gain exclusion for QSB stock held for at least four years, and
• A continued 100% gain exclusion for QSB stock held for at least five years.

These favorable OBBBA changes generally apply to QSB stock issued after July 4, 2025. For QSB stock issued before July 5, 2025, the pre-OBBBA rules still apply, and the only gain exclusion available is the 100% exclusion for stock that's held for at least five years.

Potential Savings from Tax-Favored Retirement Plans

Tax tip. If your business doesn't already have a tax-favored retirement plan, now might be the time to set one up. The OBBBA didn't make any changes that affect this strategy, but it can still be a tax-smart move.

The details. Current retirement plan rules allow for significant annual deductible contributions. For example, if you're self-employed and set up a SEP-IRA, you can contribute and deduct up to 20% of your net self-employment income, with a maximum contribution of up to $70,000 for 2025. If you're employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of up to $70,000. If you're in the 32% federal income tax bracket and make the maximum contribution, you could cut your tax obligation for 2025 by $22,400 ($70,000 × 32%).

Other small business retirement plan options include:

• Defined benefit pension plans,
• SIMPLE-IRAs, and
• 401(k) plans.

401(k)s can even be set up for just one person. These plans are called solo 401(k)s. Depending on your circumstances, these other types of plans may allow bigger deductible contributions than SEP-IRAs. For example, if you're age 50 or older, you can make catch-up contributions.

Tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can be adopted and funded as late as the due date (including any extension) of the employer's federal income tax return for the adoption year. The plan can then receive deductible employer contributions made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.

For example, Abe operates a calendar-year sole proprietorship and wants to start a SEP-IRA. He extended his 2024 personal federal income tax return until October 15, 2025. So, the deadline for setting up and contributing to his plan is October 15, 2025. Abe could claim any allowable contributions made before that date on his 2024 return.

Important: To make a SIMPLE-IRA contribution for the 2025 tax year, you must set up the plan by October 1 of this year.  

You have until next year to establish a tax-saving retirement plan (except for a SIMPLE-IRA plan). But why wait? Contact your tax advisor for more information on small business retirement plan alternatives, and be aware that if your business has employees, you may have to make plan contributions for them, too.

Clean Energy Tax Incentives

Tax tip. If you're planning to invest in any energy-efficient business assets or improvements, pay close attention to the expiration dates of any available tax credits. The new law significantly accelerated them.

The details. The OBBBA terminates a host of so-called "clean energy" business tax incentives, including the following:

Credits ending September 30, 2025:

• The Section 45W qualified commercial clean vehicle credit
• The Section 6426(k) sustainable aviation fuel credit

Tax breaks ending June 30, 2026:

• The Section 30C alternative fuel vehicle refueling credit
• The Section 179D energy-efficient commercial buildings deduction
• The Section 45L energy-efficient new home credit

Credits ending December 31, 2026:

• The Section 45Y clean electricity production credit
• The Section 48E clean electricity investment credit

Additionally, the Section 45V clean hydrogen production credit will end on December 31, 2027.

Your Porte Brown tax advisor can explain the details of what must occur by the end date to be able to claim any tax credit that may be relevant to you.

Plan and Save

The OBBBA provides welcome tax planning certainty for the next few years. It also enhances, extends and adds some attractive tax planning opportunities for small businesses and their owners. We've covered some of the most valuable, but there are more. Consult your tax advisor to learn about other tax-smart moves that could make sense for your situation.

2025 Individual Federal Income Tax Rates

The Tax Cuts and Jobs Act established seven ordinary income rates for individual taxpayers. The generally reduced rates were scheduled to sunset at the end of 2025, but the One Big Beautiful Bill Act makes these rates permanent, with annual inflation adjustments to the rate bracket thresholds starting in 2026. The 2025 rate brackets are as follows:

2025 Federal Tax Rates on Ordinary Income and Short-Term Capital Gains